North American oil and liquids-rich shale development leads to handsome margins for upstream producers, and oil prices are expected to remain well above the required margin to make fracking in hard-to-reach reservoirs economical, says Duane Grubert, Senior Analyst at Susquehanna Financial Group LLLP.
“This is still a windfall profits environment. Most of the projects that I referenced — stuff like the Wolfberry or the Eagle Ford or the Bakken — only need about $60 oil long term to justify development,” Grubert said. “So these guys on the oil side are definitely in a high-operating-margin environment.”
Grubert points to SandRidge Energy (SD) as a company reinventing itself from an almost pure-gas company into an almost pure-oil company. Grubert is positive on names changing their strategies to favor higher oil production in the current oil-prices environment.
“We have some players — SandRidge is a notable example — that are deciding that now is the time to really make progress on oil. They are spending multiples of their operating cash flow on oil drilling, funding that through divestitures, basically making the case that this is the time to exploit these higher operating margins from oil and finding creative ways to fund that,” Grubert said.
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